Budget 2024: Venture investors call abolition of angel tax a ‘huge reform’, aligns with Startup India initiative

Budget 2024: Presenting her seventh Union Budget in Lok Sabha, Finance Minister Nirmala Sitharaman on Tuesday announced the scrapping of angel tax for all investors. Venture investors hailed the proposed abolition of the decade-old tax regime as “a huge reform.”

Harsh Bhuta, Partner, Bhuta Shah, and Co LLP said that removing Angel Tax marks a transformative moment for India’s startup ecosystem, creating a more robust and supportive investment environment. 

“This move aligns with the government’s Startup India initiative, reinforcing its commitment to fostering innovation and entrepreneurship and driving economic growth towards the $5 trillion economy goal. By removing a significant funding obstacle, startups can access investments more freely, boosting job creation and innovation across various sectors,” he stated.

Harsh Bhuta further said that simplifying the funding process by eliminating bureaucratic hurdles would make it easier for startups to secure and scale investments. He said he expects this change to foster a vibrant startup ecosystem, enhance both immediate and long-term growth, and contribute significantly to India’s global competitiveness and economic aspirations.

Narinder Wadhwa, Managing Director of SKI Capital, mentioned that the abolition of the Angel Tax was a significant move aimed at fostering a more conducive environment for startup investments and entrepreneurial growth in India.

“One of the key issues with Angle Tax has been that startups often face challenges in defending their valuations, typically based on future potential rather than current financial metrics. Tax authorities would sometimes deem these valuations as inflated, leading to tax demands. Easier access to funding will enable startups to focus on innovation and scaling their operations, contributing to job creation and economic growth,” he added.

The experts noted that this tax had created an additional burden and uncertainty for investors, particularly angel investors who provided early-stage funding. This deterred potential investments and stifled the growth of startups.

“Startups had to deal with prolonged scrutiny and paperwork to justify their valuations, diverting their focus from core business activities. Removing the Angel Tax is expected to significantly reduce the compliance burden and financial strain on startups, making it easier for them to raise early-stage capital. This will likely lead to a surge in new startups and entrepreneurial ventures,” added Narinder Wadhwa.

The experts pointed out that the abolition of this tax might increase the confidence of both domestic and international angel investors in investing in Indian startups. This could lead to an influx of capital, fostering innovation and growth in the startup ecosystem.

“The abolition of the angel tax in the 2024 Budget is a landmark decision that is expected to have a profound impact on India’s startup landscape. It addresses long-standing concerns of startups and investors, paving the way for a more vibrant and dynamic entrepreneurial ecosystem. This move aligns with the broader goals of promoting ease of doing business and fostering a culture of innovation in the country,” Wadha noted.

Angel tax, introduced in 2012 to curb money laundering, unintentionally hindered genuine early-stage investments. The difference between the amount received and the fair market value is considered income and is taxed accordingly.